Silas Mason Co., Inc. v. State Tax Com'n

• Decision Date: 28 October 1936
• Docket Number: 26059.
• Citation: 61 P.2d 1269,188 Wash. 98
• Parties: SILAS MASON CO., Inc., et al. v. STATE TAX COMMISSION et al.
• Court: Washington Supreme Court

61 P.2d 1269

188 Wash. 98

SILAS MASON CO., Inc., et al. v. STATE TAX COMMISSION et al.

No. 26059.

Supreme Court of Washington, En Banc.

October 28, 1936

Appeal from Superior Court, Thurston County; John M. Wilson, Judge.

Action by the Silas Mason Company, Incorporated, and others against the State Tax Commission and others. From an adverse judgment, plaintiffs appeal.

Affirmed.

Graves Kizer & Graves, of Spokane, for appellants.

Allen Froude & Hilen, of Seattle, amici curiae.

G. W Hamilton and E. P. Donnelly, both of Olympia, for respondents.

GERAGHTY Justice.

The question in this case is the power of the state of Washington to exact its occupation tax from the appellants in respect of the compensation received by them from the federal government for the construction of the Grand Coulee Dam and power plant. The case is here on appeal from a judgment of the superior court denying injunctive relief against threatened proceedings by the respondents, members of the state tax commission, to enforce collection of the tax.

By contract, made September 17, 1934, with the United States acting through the bureau of reclamation, the appellants, other than the Mason-Walsh-Atkinson-Kier Company, for a lump sum of approximately $29,000,000, engaged to construct the dam and power plant in accordance with plans and specifications therefor embodied in the contract by reference. The contract was awarded to the appellants upon competitive bids and after public notice of a call for tenders. The appellant Mason-Walsh-Atkinson-Kier Company was not a party to the contract, but was formed by the contractors to have immediate charge of the work as their agent and representative in fulfilling the contract.

The appellants, both corporate and individual, are nonresidents of the state, and their sole business in the state is the prosecution of the work required by their contract.

As necessarily incidental to the prosecution of the contract, they conduct stores, messhouses, and other commercial activities at the dam site for the convenience of the great number of employees engaged and their families, as well as all others of the public who have occasion to visit the works. As to these collateral activities, they are conforming to the state laws and paying such license, sales, and other taxes as are required by the state.

The challenged occupation tax is sought to be assessed against the appellants pursuant to chapter 191, Laws 1933, p. 869 et seq., as amended by chapter 57, Laws 1933, Ex.Sess. p. 157 et seq., providing: 'From and after the first day of January, 1934, and until the thirty-first day of July, 1935, there is hereby levied and there shall be collected from every person engaging or continuing within this state in the business of rendering or performing services, professional or otherwise, and from every person engaging or continuing within this state in any business not specifically taxable under section 2 of this act, an annual tax or excise for the privilege of engaging in such business; as to such persons the amount of the tax or excise shall be equal to the gross income of the business multiplied by the rate of five-tenths of one per cent.' Laws 1933, Ex.Sess., p. 157, § 1.

It was held in Rainier National Park Co. v. Henneford, 182 Wash. 159, 45 P.2d 617,

that while the tax imposed by chapter 191 is an excise and not a property tax, it is in no sense a license tax and is not imposed as a prerequisite to entering into, or for the regulation of, business, but solely for revenue purposes.

The appellants contend that they are engaged in the work required by their contract as an instrumentality of the government of the United States, and as such, are immune from the occupation tax. The appellants also contend that their operations are conducted in territory exclusively occupied by the federal government under cession of jurisdiction by the state, and that, by reason of this fact, the state laws are inoperative upon them. While reserving this second objection to the tax, the point is not argued in the appellants' briefs. However, the question is urged in a companion case and disposed of adversely to the appellants' contention. Ryan v. State (Wash.) 61 P.2d 1276.

It is unnecessary to set out in any detail the provisions of the contract and specifications. It is enough to say, in so far as the fact is material, that while, under its terms, the federal government reserves a large measure of supervisory control for the purpose of insuring proper standards of material and workmanship and a compliance with the policy of the government in respect of the conditions of labor, the appellants are independent contractors.

The principle upon which the immunity of federal instrumentalities and agencies from state taxation rests is stated in Union P. Railroad Co. v. Peniston, 18 Wall. (85 U.S.) 5, 30, 21 L.Ed. 787, where, after referring to the rule often declared by that court that the taxing power of the state is one of its attributes of sovereignty, indispensable to its continued existence and not dependent upon the Constitution of the United States or derived from that instrument, it is said: 'There are, we admit, certain subjects of taxation which are withdrawn from the power of the States, not by any direct or express provision of the Federal Constitution, but by what may be regarded as its necessary implications. They grow out of our complex system of government, and out of the fact that the authority of the National government is legitimately exercised within the States. While it is true that government cannot exercise its power of taxation so as to destroy the State governments, or embarrass their lawful action, it is equally true that the States may not levy taxes the direct effect of which shall be to hinder the exercise of any powers which belong to the National government.'

In Metcalf & Eddy v. Mitchell, 269 U.S. 514, 46 S.Ct. 172, 174, 70 L.Ed. 384, it is said that just what instrumentalities of either a state or the federal government are exempt from taxation by the other, cannot be stated in terms of uniform application. Admittedly, those instrumentalities through which either government immediately and directly exercises its sovereign powers are immune from taxation by the other, and the court refers to illustrative instances in which the claim of immunity was upheld because the instrumentalities taxed were all so intimately connected with the necessary functions of government as to fall within the established exemption.

'When, however, the question is approached from the other end of the scale, it is apparent that not every person who uses his property or derives a profit, in his dealings with the government, may clothe himself with immunity from taxation on the theory that either he or his property is an instrumentality of government within the meaning of the rule. Thomson v. Union Pacific Railroad Co., 9 Wall. 579, 19 L.Ed. 792; Union P. Railroad Co. v. Peniston, 18 Wall. 5, 21 L.Ed. 787; Baltimore Shipbuilding Co. v. Baltimore, 195 U.S. 375, 25 S.Ct. 50, 49 L.Ed. 242; Gromer v. Standard Dredging Co., 224 U.S. 362, 371, 32 S.Ct. 499, 56 L.Ed. 801; Fidelity & Deposit Co. v. Pennsylvania, 240 U.S. 319, 36 S.Ct. 298, 60 L.Ed. 664; Choctaw, O. & G. R. R. Co. v. Mackey, 256 U.S. 531, 41 S.Ct. 582, 65 L.Ed. 1076.

'As cases arise, lying between the two extremes, it becomes necessary to draw the line which separates those activities having some relation to government, which are nevertheless subject to taxation, from those which are immune. Experience has shown that there is no formula by which that line may be plotted with precision in advance. But recourse may be had to the reason upon which the rule rests, and which must be the guiding, principle to control its operation. Its origin was due to the essential requirement of our constitutional system that the federal government must exercise its authority within the territorial limits of the states; and it rests on the conviction that each government, in order that it may administer its affairs within its own sphere, must be left free from undue interference by the other. McCulloch v. Maryland [4 Wheat. 316, 4 L.Ed. 579], supra; Collector v. Day [11 Wall. 113, 20 L.Ed. 122], supra; Dobbins v. Commissioners of Erie County [16 Pet. 435, 10 L.Ed. 1022], supra. * * *

'But neither government may destroy the other nor curtail in any substantial manner the exercise of its powers. Hence the limitation upon the taxing power of each, so far as it affects the other, must receive a practical construction which permits both to function with the minimum of interference each with the other; and that limitation cannot be so varied or extended as seriously to impair either the taxing power of the government imposing the tax ( South Carolina v. United States, 199 U.S. 437, 461, 26 S.Ct. 110, 50 L.Ed. 261, 4 Ann.Cas. 737; Flint v. Stone Tracy Co., supra [220 U.S. 107], at page 172, 31 S.Ct. 342 [55 L.Ed. 389; Ann.Cas.1912B, 1312]) or the appropriate exercise of the functions of the government affected by it. [Union P.] Railroad Co. v. Peniston, supra [18 Wall. 5], 31 .' Metcalf & Eddy v. Mitchell, supra.

In that case, consulting engineers had been employed to advise states or their subdivisions with reference to proposed water supply and sewage disposal systems. They claimed exemption from the federal income tax upon the portion of their net income earned through this public employment. Adverting to the principle that any taxation by one government of the salary of an officer or the public securities or an agency created and controlled by the other is prohibited, the court continues: 'But here the tax is imposed on the income of one who is neither an officer nor an employee of...